Historic Diamonds Put Lucara in Enviable Spotlight

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RAPAPORT... Lucara Diamond Corporation President and CEO William Lamb faces a dilemma many mining executives would envy. After all, when the second- and sixth-largest diamonds in history are discovered in the same week at your sole mining operation, it changes how your company is perceived, and even how it sells.

“It’s not just about marketing diamonds anymore, it’s marketing the historical significance of the world’s first diamond weighing more than 1,000 carats in over 100 years,” Lamb told Rapaport News by phone on November 19. “It’s a different thought process needed to work out the best way to value these stones.”

Lucara on Monday recovered the 1,111-carat type IIa diamond from its Botswana-located Karowe mine, claiming it as the largest gem-quality diamond to be mined since the 3,106 -carat Cullinan diamond was found at South Africa’s iconic Cullinan mine in 1905. A day or two later, the company unearthed an 813-carat diamond, which it said ranks as the sixth-biggest ever found, and a 374-carat diamond.

Lucara’s shares jumped over 30 percent on the news in early Thursday morning trade on the Toronto Stock Exchange. That’s even as Lamb might have preferred to wait before he had more clarity on the value of the stones.

Unknown Potential

As a public company, Lucara had to announce the finds even before it knew the true potential of them. Measuring 65mm x 56mm x 40mm, the 1,111-carat stone was too large to fit into the Sarine machine that would have given some indication of its quality, its potential polished outcome and estimated value, Lamb quipped. He’s understandably preparing to avoid that question for the next few days.

Either way, the diamond(s) are a coup for Lucara and its relatively new Karowe mine, which had already developed a reputation for producing large diamonds and selling them for top dollar at its exceptional diamond tenders – even in the current weak market.

Just this month, the company sold 13 individual stones weighing 1,440 carats for an average price of $20,625 per carat. While analysts questioned why that was almost half the average price achieved at its previous July tender, Lamb explained that the vast majority of the better-quality diamonds mined at Karowe this year were already sold in July. Selling Abroad

Lucara is not planning to sell this weeks’ batch of historical diamonds at the tenders. Unlike its commercial and “regular” exceptional production that it has to sell in Gaborone, the Botswana government has agreed to allow the company to market the stones abroad – most likely in Antwerp - to gain maximum exposure. One might expect a tour of the major diamond centers in the coming months to garner interest.

Lamb notes that Minister of Mineral, Energy and Water Onkokame Kitso Mokaila and Diamond Hub chairman Jacob Thamage were among the first phone calls he made about the diamonds. Since Karowe is 100-percent owned by Lucara, the government will be entitled to a 10 percent royalty on the sales and any taxes that might apply, rather than a profit share, he added.

However, Lamb stresses that these diamonds are about a lot more than monetary value for both Botswana and Lucara. Instead, they have they have the potential to reaffirm Botswana’s status as the most important diamond mining - and de-facto trading – center. X-Ray Vindication

For Lucara, they answer some questions that skeptics may have had about the mine’s ability to continue to produce large diamonds at the same rate as it has since launching production in mid-2013. They also vindicate the company’s recent $55 million investment in a plant optimization project that included two new crushers, a new section in the recovery plant and, perhaps most significantly, the Large Diamond Recovery XRT machines installed at Karowe earlier this year.

Lamb insists that the recovery of these diamonds would not have been possible without the XRT machines. “If we hadn’t installed the new machines, both those stones would have gone to the crusher at a close side setting of 35 mm and they would have been fragmented,” he said.

As such, one might suggest that the $55 million outlay would have paid for itself just this week. At the very least, the diamonds are expected to give Lucara a further cash and revenue boost when they’re eventually sold next year. That would add to its already strong balance sheet.

The company reported that its nine-month revenue was down 19 percent year on year to $185.6 million largely on lower volumes sold and market-driven weakness in its commercial goods. Profit fell 6 percent to $$58.8 million in the same period. However, perhaps more significantly, the company had a cash balance of $122.7 million at the end of the third quarter on September 30, up from $100.8 million at the beginning of the year, and hadn’t drawn on a $50 million credit facility.

Cash Options

The company has a number of options, or plans, of what to do with its cash. For one, Lamb said it will probably shift to a quarterly dividend from its current semi-annual payout. For another, he noted that as part of the Lundin Group, the company is always looking for potential acquisitions, be it of other mines or peer companies. Lucara is also exploring the potential to use its knowledge of the XRT machines to maximize other companies’ resources, Lamb added.

The company also has its current assets to consider. Those include four prospecting licenses in Botswana, the most promising of which is the BK2 kimberlite not far from Karowe. And while Karowe has a current life of mine of the open pit to 2026, Lucara will allocate part of its 2016 budget to explore possible underground mining of another 12 years beyond that.

The question for many is whether it can sustain the type of high-quality production announced this week in the long term. At least for now, Lucara - and its Karowe asset - is the envy of the diamond mining fraternity.